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The Pennsylvania Public Utility Commission (PUC) Thursday ordered an investigation of Philadelphia Gas Works (PGW) request to increase natural gas rates by $107 million, or 11%. The cash-strapped utility, which is owned by the city of Philadelphia, has become a political issue in the coming mayoral election, and some critics want it sold or taken over by the PUC.

The PUC voted unanimously to investigate PGW's proposal to increase rates beginning Feb. 20. Under PGW's proposal, residential customers using 89 Mcf of natural gas would see annual rate hikes of more than 9%, with bills increasing to $1,887 from $1,727. Commercial customers using 444 Mcf a year would see bills increase to $769 from $680, or 13.2%. Industrial customers using 1,185 Mcf a year would see bills rise to $1,984/month from $1,815, or 9.3%.

According to PGW, the increase is needed to recover nongas operating expenses and interest expense, to increase earnings to meet debt service obligations and to ensure the company has adequate liquidity when needed without continually borrowing. PGW, which serves 496,000 customers in Philadelphia, is more than $1 billion in debt. It filed the rate request in December.

"PGW is [the] No. 1 energy issue in Philadelphia," PUC Chairman Wendell F. Holland said. "I would like to emphasize that public participation is a vital part of the ratemaking process. To that extent, I urge the Office of Administrative Law Judge (ALJ) to schedule numerous public input hearings in Philadelphia to ensure all consumers have the opportunity to have their say. Public input hearings provide consumers the opportunity for consumer testimony to become part of the record in the case."

PGW spokesman Doug Oliver said PGW has reduced "most of its operating costs," but "other issues such as interest on debt, pension and healthcare have increased for PGW just as they have for many other large corporations. The overwhelming majority of PGW's operating costs are fixed. So while PGW continues to identify efficiencies and cost savings, we simply can"t generate enough savings soon enough to avoid having to request the rate increase."

Without a rate hike, PGW said it "could suffer severe financial setbacks that would affect its ability to function... Funds would be used not only to pay the increased operating expenses, but to reduce the amount of expensive debt carried by PGW, thus reducing costs to customers."

The PUC's action assigns the issue to the ALJ for a recommended decision to approve, reject or modify the proposal. PGW's rate increase proposal will be suspended for up to seven months, and the PUC will have until Sept. 20 to make a final decision.

"As cold weather grips the city, the challenge facing this commission is to strike a balance between needs of this unique consumer base with the fiscal needs of this company," Holland said. "Today, we are ordering the examination of the filing made by PGW that will closely examine all sides of the issues in accordance with the procedures provided by the Public Utility Code. The code provides for a ratemaking process that strives to achieve the lowest reasonable rate for consumers while maintaining the financial stability of the utility."

Pennsylvania State Rep. Dwight Evans, who is expected to run for mayor of Philadelphia in the May 15 Democratic primary, in January introduced legislation allowing the PUC to take control of PGW. If approved by the state legislature, the measure would allow the PUC to order the sale of PGW or allow PGW to merge with another utility. PUC has authority over PGW rate requests, but the utility is managed by the city.

In a report on financial challenges facing the city, the Pennsylvania Intergovernmental Cooperation Authority (PICA) last September called PGW a "simmering crisis."

According to PICA, Philadelphia's next mayor "will have a budget that relies in part on the receipt of a $45 million loan repayment from PGW. It is unlikely that PGW will make that loan repayment and it is possible that additional financial difficulties at PGW could force the city to make additional payments to the utility or even face a PGW financial collapse that would have ramifications for the entire region." The report stated, "PGW is treading water financially until serious plans for its future can be determined."

The city, meanwhile, is considering opportunities to sell PGW, according to the Philadelphia Daily News.

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